Problem 7-10

You have been assigned the task of estimating the expected returns for three different stocks: QRS, TUV, and WXY. Your preliminary analysis has established the historical risk premiums associated with three risk factors that could potentially be included in your calculations: the excess return on a proxy for the market portfolio (MKT), and two variables capturing general macroeconomic exposures (MACRO1 and MACRO2). These values are: _MKT = 7.2%, _MACRO1 = -0.1%, and _MACRO2 = 0.4%. You have also estimated the following factor betas (i.e., loadings) for all three stocks with respect to each of these potential risk factors:

	FACTOR LOADING
Stock	MKT		MACRO1		MACRO2
QRS	1.31		-0.52		0.00
TUV	0.94		0.64		0.32
WXY	1.02		-0.12		0.00

1. Calculate expected returns for the three stocks using just the MKT risk factor. Assume a risk-free rate of 4.2%. Round your answers to three decimal places.

   Expected return for stock QRS: %

   Expected return for stock TUV: %

   Expected return for stock WXY: %

2. Calculate the expected returns for the three stocks using all three risk factors and the same 4.2% risk-free rate. Round your answers to three decimal places.

   Expected return for stock QRS: %

   Expected return for stock TUV: %

   Expected return for stock WXY: %

3. What sort of exposure might MACRO2 represent?

   MACRO2 might represent (Select-a systematic an industry-specific) factor.